Question
Stock Expected Return Starbucks 0.18 Sears 0.08 Arcade 0.16 Limited Brands 0.12 Considering the informtion provided below: R f = 0.06, E(R m ) =
Stock | Expected Return |
Starbucks | 0.18 |
Sears | 0.08 |
Arcade | 0.16 |
Limited Brands | 0.12 |
Considering the informtion provided below:
Rf= 0.06, E(Rm) = 0.16, Rm = 0.2
a) Derive the equations of the Security Market Line (SML) and the Capital Market Line (CML), show them graphically and determine the equilibrium prices of the total risk and the systematic risk.
b) Discuss the effects of an increase in the risk aversion in the market in terms of both the CML and SML.
c) If you decide to invest $4,000 in Starbucks, $6,000 in Sears, $12,000 in Arcad, and $3,000 in Limited Brands, find the expected return and the risk of your portfolio as measured by beta.
d) Assuming that the prices of the above stocks are realized as follows:
Stock | P0 | P1 | Evaluation | Decision |
Starbucks | 40 | 45 | ||
Sears | 22 | 25 | ||
Arcade | 25 | 29 | ||
Limited Brands | 40 | 45 |
Determine whether the above stocks are overvalued, undervalued or priced fairly, and indicate your decision.
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